Investment Analysis
Exam Review
Course Introduction
Investment Analysis is a comprehensive course designed to equip students with the fundamental principles and practical techniques involved in evaluating various investment opportunities. The course covers the key concepts of risk and return, portfolio theory, asset pricing models, security analysis, and valuation methods for stocks, bonds, and alternative investments. Students will also explore the role of financial markets, behavioral finance considerations, and the use of financial statements in making informed investment decisions. Through case studies and real-world applications, the course prepares participants to critically analyze investment options, develop portfolio strategies, and understand the regulatory and ethical standards that govern investment practices.
Recommended Textbook
Principles of Investments 1st Edition by Michael
Drew
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1052 Verified Questions
1052 Flashcards
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Page 2
Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?
A)Auditing
B)Public finance
C)Corporate governance
D)Public reporting
Answer: C
Q2) Financial institutions that specialise in assisting corporations in primary market transactions are called ________.
A)mutual funds
B)investment bankers
C)pension funds
D)globalisation specialists
Answer: B
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Chapter 2: Asset Classes and Financial Instruments
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59 Flashcards
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Sample Questions
Q1) If you thought prices of share would be rising over the next few months you may wish to ________ on the share.
A)purchase a call option
B)purchase a put option
C)sell a futures contract
D)place a short sale order
Answer: A
Q2) Which one of the following is a true statement regarding corporate bonds?
A)A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares.
B)A corporate debenture is a secured bond.
C)A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.
D)Holders of corporate bonds have voting rights in the company.
Answer: C
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Chapter 3: Securities Markets
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Sample Questions
Q1) You want to buy shares of ABC, but the current share price is too high given the firm's prospects. What type of trading order might you give to your broker?
A)limit buy orders
B)market buy orders
C)stop-loss orders
D)stop-buy orders
Answer: A
Q2) An investor buys $16 000 worth of a share priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The share pays a $0.50 per share dividend in one year and then the share is sold at $23 per share. What was the investor's rate of return?
A)17.50%
B)19.67%
C)23.83%
D)25.75%
Answer: C
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Chapter 4: Managed Funds and Other Investment Companies
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Sample Questions
Q1) Managed funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector, are called ________.
A)asset allocation funds
B)balanced funds
C)index funds
D)income funds
Q2) Which of the following funds is usually most tax efficient?
A)Equity funds
B)Bond funds
C)ETFs
D)Specialised sector funds
Q3) Advantages of investment companies to investors include all but which one of the following?
A)Record keeping and administration
B)Low-cost diversification
C)Professional management
D)Guaranteed rates of return
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Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) Which one of the following measures time-weighted returns?
I. Geometric average return
II. Arithmetic average return
III. Dollar-weighted return
A)I only
B)II only
C)I and II only
D)I and III only
Q2) Suppose you pay $9700 for a $10 000 par Treasury bond maturing in three months.
What is the holding period return for this investment?
A)3.01%
B)3.09%
C)12.42%
D)16.71%
Q3) The geometric average of -12%, 20% and 25% is ________.
A)8.42%
B)11.00%
C)9.70%
D)18.88%
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Page 7
Chapter 6: Efficient Diversification
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Sample Questions
Q1) Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of Security B in the minimum variance portfolio is ________.
A)10%
B)20%
C)40%
D)60%
Q2) Decreasing the number of shares in a portfolio from 50 to 10 would likely ________.
A)increase the systematic risk of the portfolio
B)increase the unsystematic risk of the portfolio
C)increase the return of the portfolio
D)decrease the variation in returns the investor faces in any one year
Q3) Risk that can be eliminated through diversification is called ________ risk.
A)unique
B)firm-specific
C)diversifiable
D)all of the above
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Chapter 7: Capital Pricing and Arbitrage Pricing Theory
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Sample Questions
Q1) According to the capital asset pricing model, ________.
A)all securities' returns must lie on the capital market line
B)all securities' returns must lie on the security market line
C)the slope of the security market line must be less than the market risk premium
D)any security with a beta of 1 must have an excess return of zero
Q2) The graph of the relationship between expected return and beta in the CAPM context is called the ________.
A)CML
B)CAL
C)SML
D)SCL
Q3) According to the capital asset pricing model, fairly priced securities have ________.
A)negative betas
B)positive alphas
C)positive betas
D)zero alphas
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9
Chapter 8: The Efficient Market Hypothesis and Behavioral Finance
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Sample Questions
Q1) According to the semi-strong form of the efficient markets hypothesis ________.
A)share prices do not rapidly adjust to new information
B)future changes in share prices cannot be predicted from any information that is publicly available
C)corporate insiders should have no better investment performance than other investors even if allowed to trade freely
D)arbitrage between futures and cash markets should not produce extraordinary profits
Q2) The primary objective of fundamental analysis is to identify ________.
A)well run firms
B)poorly run firms
C)mis-priced shares
D)high P/E shares
Q3) Evidence suggests that there may be ________ momentum and ________ reversal patterns in share price behaviour.
A)short-run, short-run
B)long-run, long-run
C)long-run, short-run
D)short-run, long run
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Chapter 9: Bond Prices and Yields
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Sample Questions
Q1) Everything else equal, the ________ the maturity of a bond and the ________ the coupon the greater the sensitivity of the bond's price to interest rate changes.
A)longer; higher
B)longer; lower
C)shorter; higher
D)shorter; lower
Q2) A convertible bond has a par value of $1 000 but its current market price is $975. The current price of the issuing company's shares is $26 and the conversion ratio is 34 shares. The bond's market conversion value is ________.
A)$1 000
B)$884
C)$933
D)$980
Q3) You would typically find all but which one of the following in a bond contract?
A)A dividend restriction clause
B)A sinking fund clause
C)A requirement to subordinate any new debt issued
D)A price earnings ratio
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11
Chapter 10: Managing Bond Portfolios
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Sample Questions
Q1) An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude.
A)greater than
B)equivalent to
C)smaller than
D)The answer is uncertain
Q2) You have an investment that in today's dollars returns 15% of your investment in Year 1, 12% in Year 2, 9% in Year 3 and the remainder in Year 4. What is the duration of this investment?
A)4 years
B)3.50 years
C)3.22 years
D)2.95 years
Q3) All else equal, bond price volatility is greater for ________.
A)higher coupon rates
B)lower coupon rates
C)shorter maturity
D)lower default risk
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Chapter 11: Equity Valuation
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Sample Questions
Q1) Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 13%. The shares of Interior Airline have a beta of 4.00. Using the constant growth DDM, the intrinsic value of the shares is ________.
A)$10.00
B)$22.73
C)$27.78
D)$41.67
Q2) The market capitalisation rate on the shares of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plouwback ratio is 50%, its P/E ratio will be ________.
A)8.33
B)12.50
C)19.23
D)24.15
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13
Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1) Industry sales have grown at 15-20% per year in recent years and are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2) Some US manufacturers are attempting to enter fast-growing non-US markets, which remain largely unexploited. 3) Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4) The current penetration rate in the US is 60% of households and will be difficult to increase. 5) Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6) Some manufacturers are able to develop new, unexploited niche markets in the US based on company reputation, quality and service. 7) Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8) New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the ________ stage.
A)start-up
B)consolidation
C)maturity
D)relative decline
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Page 14
Chapter 13: Financial Statement Analysis
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55 Flashcards
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Sample Questions
Q1) Which of the following is not a ratio used in the DuPont analysis?
A)Interest burden
B)Profit margin
C)Asset turnover
D)Earnings yield ratio
Q2) Which of the following transactions will result in a decrease in cash flow from operations?
A)Increase in accounts receivable
B)Decrease in inventories
C)Decrease in taxes payable
D)Decrease in bonds outstanding
Q3) Which of the following would result in a cash inflow under the heading 'Cash flow from investing' in the statement of cash flows?
A)Purchase of capital equipment
B)Payments to suppliers for inventory
C)Collections on receivables
D)Sale of production machinery
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Chapter 14: Options and Risk Management
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Sample Questions
Q1) You invest in the share of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________.
A)covered call
B)long straddle
C)naked call
D)money spread
Q2) Perfect dynamic hedging requires ________.
A)a smaller capital outlay than static hedging
B)less commission expense than static hedging
C)daily rebalancing
D)continuous rebalancing
Q3) You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________.
A)time spread
B)long straddle
C)short straddle
D)money spread
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Chapter 15: Futures and Risk Management
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Sample Questions
Q1) A bank has made long-term fixed rate mortgages and has financed them with short-term deposits. To hedge out the bank's interest rate risk they could ________.
A)sell T-bond futures
B)buy T-bond futures
C)buy stock index futures
D)sell stock index futures
Q2) A hog farmer decides to sell hog futures. This is an example of ________ to limit its risk.
A)cross hedging
B)short hedging
C)spreading
D)speculating
Q3) A long hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.
A)long; long
B)long; short
C)short; long
D)short; short
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Chapter 16: Investors and the Investment Process
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Sample Questions
Q1) Many defined benefit pension plans have a target rate of return on investment equal to ________.
A)the firm's return on equity
B)the plan's assumed actuarial rate of return
C)the economic inflation rate because wages often increase with inflation
D)the estimated share market return
Q2) The choice of an active portfolio management strategy rather than a passive strategy assumes ________.
A)the ability to continuously adjust the portfolio to provide superior returns
B)asset allocation involving only domestic securities
C)stable economic conditions over the short term
D)the ability to minimise trading costs
Q3) Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in ________.
A)long term bonds
B)money market mutual funds
C)savings accounts
D)short term commercial paper
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18
Chapter 17: Hedge Funds
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Sample Questions
Q1) Typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.
A)5%
B)10%
C)20%
D)25%
Q2) Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio ________ and a long position in portfolio ________.
A)A; A
B)A; B
C)B; A
D)B; B
Q3) ________ allow for more active short-selling and derivatives positions.
A)Commingled funds
B)REITs
C)ETFs
D)130/30 Funds
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Page 19
Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) The M<sup>2</sup> measure is a variant of ________.
A)the Sharpe measure
B)the Treynor measure
C)Jensen's alpha
D)the appraisal ratio
Q2) The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called ________.
A)the bogey portfolio
B)the Vanguard Index
C)Jensen's alpha
D)the Treynor measure
Q3) Consider the theory of active portfolio management. Shares A and B have the same beta and non-systematic risk. Share A has higher positive alpha than share B. You should want ________ in your active portfolio.
A)equal proportions of shares A and B
B)more of Share A than Share B
C)more of Share B than Share A
D)more information is needed to answer this question
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